Sunday, August 1, 2010

July Milk Prices are up, but....

Class III milk prices were up slightly for July, as cheese prices continue to improve. (Please see the April 7, 2009 post to this blog for a review of the close relationship between cheese prices and Class III milk prices.) July's Class III price was $13.74, up from $13.62 in June.

Looking forward, cheese prices appear to be improving which will continue to improve the Class III milk price. The encouraging part about cheese prices is that the underlying data indicates that the cheese inventories are shrinking which will allow cheese prices to continue their recovery.

The NASS cheese prices on which milk component prices are based are published one to two weeks behind the CME prices. The latest CME prices indicate that the NASS prices will continue to improve.

Cheese inventories have been abnormally high keeping cheese prices low, but the high inventories are now coming down to more normal levels. The chart below shows the high levels of current cheese inventories. As these high inventory levels decline, cheese prices can be expected to improve.

When compared to the 2008 and 2009 period, 2010 cheese inventories are showing a return to more normal levels. The chart below shows the change in 2010 inventories vs. 2009 and 2008 levels. The difference between the current year and the prior years is down nearly 50%.

The unusual part of the July announcement was the interplay between the protein price and the butterfat price.

The butterfat price was extremely high which drove down the protein price significantly. A full explanation of this relationship will be given in the next post to this blog. Butterfat increased from $1.72/lb. in June to $1.90/ lb. This increase in the butterfat price drove the protein price down from $2.20/lb. to $2.05/lb.

The price of butterfat is very high due to the extremely low inventories.

The cylical inventory levels for butter are far below where they normally are at this time of the year. This is driving butter prices extremely high. A similar situation developed in 2004 sending butterfat prices to $2.50/lb.

Overall the dairy markets are improving. The financial health of the dairy industry is very dependent on the price of cheese. The oversupply in cheese inventories is decreasing and this will increase the price of cheese and thereby the price of Class III milk. However, it will probably take the remainder of 2010 for this to play out.